The Limited Liability Company

 

      The Limited Liability Company has become one of the most popular forms of business organization.  The advantages of a limited liability company are the following: Double taxation can be avoided; personal liability is limited as in corporate organization; there is much less paperwork than in corporate organization; it is easier to form a limited liability company; it is easy to convert a current business to an LLC; it is inexpensive to establish and maintain an LLC.

 

      LLCs must conform to the Uniform Limited Liability Act of 1995.  The most important points in the ULLA are the following: The LLC must have an identity different from its members, it may be organized for profit or non-profit, some states allow an LLC to have one member, and some states require that the LLC have at least two members.  Members of the LLC have limited liability, etc.

 

      The LLC can also help to protect assets.  One idea is to owe the LLC money.  The LLC can then accept a mortgage on your home and personal property.  If you later have personal credit problems, the mortgage that you owe your LLC can protect your assets from the IRS or other creditors. You can also transfer assets to different LLCs instead of transferring all the assets to one LLC.  The more entities you have to own assets, the harder it will be for the IRS or other creditor to attach assets.  An LLC can also be set up in combination with a foreign trust system.  It is necessary to make property transfers to the LLCs far in advance of anticipated liability problems to avoid fraudulent transfer assertions. 

 

      LLCs make good entities for the transfer of real estate and other investments to other individuals.  Once an LLC owns the property, an LLC membership interest can be gifted instead of gifting the actual property.  The LLC is more flexible than a trust arrangement for the purpose of gifting assets.  It is more flexible than a trust and there are no limitations to the number of members or mandatory income distributions. 

 

      In summary, an LLC has benefits of both a corporation and a limited partnership.  It may have tax benefits or disadvantages depending on the situation.  It can be organized in another state.  Managers and members of the LLC do not have personal liability for the debts of the LLC.  A creditor of a member in an LLC can generally obtain only a charging order against that member's interest and the creditor can only get distributed profits but the creditor becomes liable for the taxes that are attributable to the member's share of the profits.  The LLC can function as a business or it can hold assets and passive investments.

 

Bankruptcy and the IRS Lien

 

            If you have a retirement fund that the IRS cannot take from you in bankruptcy court, it is still possible that the IRS will attempt to claim that the taxes are secured by their lien on your exempt asset.  Although, the IRS' lien may survive bankruptcy as to the value of the exempt asset, the IRS should not be allowed to secure the tax that is otherwise dischargeable.  Be sure to fight back hard if the IRS argues that an exempt asset secures your taxes. 

 

            Although IRS levy powers typically include the right to levy on various categories of retirement and pension plans, as a general rule IRS Collection activity policies discourage levy on social security, veteran's pension plans, benefits under the GI Bill of Rights, disability benefits, and similar income.

 

            The IRS ordinarily may not levy on the corpus of a pension fund if the employee does not have the right to access the funds in a lump sum.  (IRM 536(14.5)(1).  And a levy may not attach to ERISA pension payments until a taxpayer has a right to receive such payments:

 

            For a levy to attach funds in a pension or retirement plan, the taxpayer must have an unqualified, unconditional right to demand payment from the plan.  The levy only attaches the taxpayer's present right.  If the taxpayer's only present right in the plan is a right to receive payments in the future, the Service is not presently entitled  to receive any amounts for the levy. (Rev. Rul 55-210 (1955-1).  The IRS' interest in a lien on exempt property is protected even if otherwise dischargeable taxes are determined to be discharged by the Court. See In re Frengel, BR 115 569 and In re Zouhar, 10 BR 154.  The Court does not have to declare the tax is undischargeable to protect the government's interest.

 

Jury Nullification

 

            The right of "jury nullification" goes back to Britain in the eighteenth-century when jurors, in spite of the fact that they were fined and jailed, refused to convict two Englishmen for speaking to a street crowd.  There is a plaque in the Old Bailey courthouse in London which attests to the courage of the jurors and the final opinion of the high court which "established the right of Juries to give their Verdict according to their conviction."

 

            In the United States, the principal of jury nullification was affirmed in 1735,   when John Zengler, a New York printer, was acquitted by a jury of seditious libel.  The jury ignored the judge's instructions. 

 

            In the nineteenth century, the courts began to rule that the juries did not have the right to decide the law; they could only decide the facts and they had to follow the judge's instructions.  However the matter was not settled, because juries can vote their consciences no matter what the judge says the law is.  Wigmore, a famous legal scholar wrote in 1929:

 

"Law and Justice are  from time to time, inevitably in conflict.   That is because law is a general rule;...The jury, in the privacy of its retirement, adjusts the general rule of law to the justice of a particular case...The jury, and the secrecy of the jury room, are indispensable elements in popular justice."

 

Roscoe Pound, another famous legal scholar, had previously stated in 1910, that "jury lawlessness is the great corrective in legal proceedings."

 

More recently, the Circuit Court of Appeals, while affirming convictions of the Catonsville Nine draft board evaders, made the following perceptive statement:

 

"We recognize...the undisputed power of the jury to acquit, even if its verdict is contrary to the law as given by the judge and contrary to the evidence...If the jury feels that the law under which the defendant is accused is unjust, or that exigent circumstances justified the actions of the accused, or for any reason which appeals to their logic or passion, the jury has the power to acquit and the courts must abide by that decision."

 

            Unfortunately, the Courts do not explain to the jurors that they have the right to nullify the law.  Jurors must come to an understanding of this fact before they are called to jury duty.  Dr. Spock and others were tried during the Vietnam war for their anti-government activity. One of the jurors wrote to the Boston Globe about his depression regarding the verdict.  He did not know about jury nullification. He said:

 

"How and why did I find four men guilty?  All men of courage and individuals whom I grew to admire as the trial developed...As the father of three teen-aged sons, two eligible for the draft, and a veteran myself, my abhorrence of war is understandable...Was I ready to commit my sons?...Rev. Coffin's thought provoking argument struck home--"Isn't the Cross higher than the flag?  Must we not obey God before we obey man?..."The paradox was that I agreed wholeheartedly with these defendants, but...I felt that technically they did break the law...I departed to the waiting car and then to home.  There I was embraced by my loved ones and I began to think and try to explain...These four men were trying to save my sons whom I love dearly, yet I found them guilty.  To hell with my ulcer.  After four or five stiff hookers (I lost count) I began to cry bitterly."

 

            So, as you can see, the jury nullification issue is very important.  As a juror, you can disregard the judge's instructions and vote based on your conscience.